The Marketing Capability Premium

Marketing capability refers to a firm’s ability to optimally deploy and integrate different marketing inputs to achieve high sales at low cost. This paper examines whether the value of marketing capability is incorporated into stock returns. High-level marketing capability predicts better future operating performance and stock returns. A marketing capability-based long-short portfolio strategy earns an average annual return of 5.16%, a substantial portion of which is earned over subsequent earnings announcements. The return predictability is stronger in stocks with higher valuation uncertainty and lower investor attention. Investors underreact to the value-relevant, but difficult to process, information embedded in marketing capability. (JEL G12, G14, G10, M30) Received July 2, 2020; editorial decision October 12, 2021 by Editor Jeffrey Pontiff. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.